Our Political System is Broken

Please continue to help the blog grow.  Forward this to others who may be interested.  At the bottom of the article, you can find out how to sign up for the email service.




Approximately two weeks ago, I did a webinar for the McCombs Alumni.  I discussed my view of the economy.  If you want to listen, it lasts approximately one hour.  You do NOT need to be affiliated with McCombs in order to access this.  You can find it at the following link:

Webinar Link




1. Market

Slight continuation to rally. Stocks rose for the fourth day in a row, with the Dow up 9.45 points.   While the gain was small, the market was up 3% for the four day trading week.




Two year Treasury yields have risen from .747% in early February to .924% on Friday.  This is a really big move in this market.  Some of the move came from worries about sovereign debt (triggered by Greece) and then a lot of the move was triggered by the Fed’s increase of the discount rate (which made investors believe that a move in the Fed funds rate would follow).




More supply coming. This week, we’re going to sell $118 billion in two, five and seven year Treasuries.




Some people argue that relatively low Treasury yields reflect the fact that this is still considered the worldwide risk free asset.  But, there are reasons that rates could increase and investors could stop thinking of the Treasury as risk-free, including:

1. the rise of emerging markets will consume more capital and make investment in the US less attractive
2. the US problem is structural, not cyclical.  We have long term unfunded liabilities
3. more economic growth will lead to higher interest rates and this will lead to a much bigger interest expense for the US (where the average maturity of our debt is less than five years)

S&P cut all AAA rated Greek ABS and MBS to AA. This is only $17 billion worth of securities, but it reflects the increased risk that will result from austerity measures.  Moody’s said that they will also review several Greek issuances.




Fears of trickery. There are fears that other EU countries have used derivatives and other mechanisms to hide debt.  EU countries are supposed to avoid having a deficit that is larger than 3% of GDP or debt that is greater than 60% of GDP.




2. Economic News

China continues to restrict lending. The China Banking Regulatory Commission issued two regulations over the weekend:

1. individual borrowers may not obtain loans if they do not specify what the money is to be used for; and
2. with respect to working capital loans, banks must calculate borrowers’ actual needs and also consider their cash flow, liabilities, repayment abilities and other factors

Again, these are clear signals that China is worried about lending practices and bubbles.




Low inflation. Consumer prices increased .2% in January and 2.6% YOY.  But, the core number (excluding food and energy) dropped .1% in January and was up 1.6% YOY. Much of the price decrease came from the price of shelter. This report furthers the belief that inflation is not a risk and focus must remain on creating jobs.




Hourly wages are not keeping up with inflation. Average hourly earnings for employees were unchanged in January.  Over the last year, average weekly earnings are down 1.5%.




It’s no big deal! NY Fed President William Dudley said that changing the discount rate was “a very small technical change.”  The Fed is arguing that this was simply a signal that banks are recovering and that this is simply a move back toward normal. It is certainly possible that this was the Fed’s attempt to signal recovery of the economy.  Investors are scared that this is the start of the tightening process.




Delinquencies. At the end of Q4, 15% of home loans (7.8MM households) are either delinquent or in foreclosure.  In Q4 of 2008, this was 11%.  One reason that this number is increasing is that the system is logjammed and people are staying in their house longer (before being foreclosed upon).  Approximately 2.9MM households are 90 days or more delinquent but not in foreclosure.




The good spin. The Mortgage Bankers Association (which gave us the report mentioned above) also said that 3.63% of mortgage borrowers were 30 – 59 days overdue in Q4 (down from 3.79% in Q3).  This category reflects “new problems” and it is declining because fewer people are losing jobs.




The human side of unemployment. The NYT had a really good article about the human side of unemployment.  The story described people who had reached the middle class, lost their jobs and are unlikely to regain their financial footing.




The bottom line is that we will see many people fall out of the middle class.  In addition, we will see a heavy burden fall upon food banks and other social welfare networks – at the same time that they are receiving fewer donations.

For several months, we’ve been talking about the fact that it’s going to take a long time to return to full employment.  In April, approximately 2.7MM people will lose their unemployment check unless Congress extends the benefits.  Approximately 6.3MM Americans have been unemployed for six months or longer.  (This is the highest number since the government has been collecting data and is more than twice as large as the next worst period.  Of course, our work force has grown significantly.)




Fundamental changes have made a quick recovery in the job market less likely (NYT article):

1. the control of companies by institutional investors and the importance of the quarterly number (which discourages hiring more people)
2. declining importance of unions which makes it easier to shift work to part-time workers
3. the shifting of manufacturing jobs (and even white collar jobs) to low cost countries
4. automation (which has cut 5.6MM jobs since 2000)

We have seen slower job growth in each economic expansion. Before 1990, it took an average of 21 months for the economy to recover the jobs lost in a recession.  After 1990, it took 31 months.  After 2001, it took 46 months.




In the past year, approximately 2/3 of unemployed people received unemployment compensation.  The remaining third either exhausted their benefits or didn’t meet the requirements or didn’t apply.




3. Really Important Political Issues

I think that we have two huge problems in the US: we have incredible unfunded liabilities and our Congress is dysfunctional.  In other words, we have a huge financial problem and we don’t have a way to solve it.




I would suggest that you read Evan Bayh’s editorial in the NYT. Senator Bayh (Indiana Democrat) recently announced that he would not run for re-election (even though he is supposed to be leading in the polls).  He describes several huge problems in our political process (and he recommended voting against all incumbents), including:

1. strident partisanship
2. unyielding ideology – citizens are increasingly extreme (conservative or liberal) and any type of compromise is seen as weakness
3. a corrosive system of campaign financing – it’s hard to finance a campaign from small contributions, so politicians approach the wealthy, the parties and the PACs.  This will get worse as the Supreme Court has said that corporations and unions cannot be limited as to their spending on political ads.  This is likely to force politicians to support most of the views of particular groups.
4. gerrymandering of House districts – seats become Republican or Democrat and that means that the party is actually choosing the Representative.  This means that the Representative is a party ideologue.
5. endless filibusters – it is too easy to filibuster and stop the country’s business
6. holds on executive appointees in the Senate
7. dwindling social interaction between senators of opposing parties – we’re less likely to compromise with people that we don’t know or understand
8. caucus system that promotes party unity at the expense of bipartisan consensus

Senator Bayh\’s NYT Editorial

In case you’re wondering…it takes 60 votes to end a filibuster. To end a filibuster, there must be a motion for cloture.  If it takes 41 Senators to block a bill, that could conceivably represent as little as 11% of the population (if the Senators come from the least populated states).  The idea of the filibuster is to force the majority to work with the minority.  But, we’ve become so partisan that everything simply grinds to a halt.  (In my house, it just takes one vote to cause cloture and it’s not a vote that I have…)




Some people feel like Congress can handle acute problems (like averting a depression) but can’t handle chronic problems (unfunded liabilities).




The Governator shows a nonpartisan streak! California Governor Scwarzenegger said that President Obama’s stimulus plan is “terrific” and has created 150K jobs in his state.  He complained about his fellow Republicans who are blasting the President.




States have a $1 trillion unfunded liability in pension liabilities to their employees. This is probably significantly understated, since the Pew Center based their analysis on data from fiscal 2008 (ending the middle of 2008).  Approximately 84% of state employees have a defined benefit plan.  Only 21% of private employees have this.




As mentioned a year ago, a study by Carmen Reinhart and Ken Rogoff indicate that public debt increases 86% following a financial crisis.




This could end badly. In past weeks, I’ve discussed the “bipartisan” debt commission that seems to have little hope of success.  One disaster from this commission could be if they highlight the problems, cause more concern and then show that we have no solution.




GM CEO Ed Whitacre (who forced out Fritz Henderson) is going to receive compensation of $9MM. In addition, Fritz Henderson will receive $59K / month for 20 hours of consulting per month.  I am also trying to get my hourly rate up to $3,000, but I have not been successful so far.




4. Credit Card Laws

New credit card laws take effect on Monday. Credit card companies must disclose how long it will take to pay off the balance if a customer only makes the minimum monthly payment.  In addition, customers can exceed their credit limit only if they agree ahead of time to pay a penalty fee.  Importantly, interest rate increases will only affect new purchases, not existing balances (unless you miss payments for more than 60 days).  There are estimates that these changes will cost the industry $12 billion per year.  As a result, annual fees are being increased, as are balance transfer charges and fees for international transactions.




Credit card companies can still raise rates – but they need to give you 45 days notice.  From December 2008 through July 2009, the average increase in credit card interest rates was two percent.




Borrowers can expect to see higher fees for many things (such as year end itemizations). Currently, only 20% of cards have annual fees.  Some banks are charging inactivity fees.  In addition, banks are trying to move customers to variable rate cards.




5. Random

This is going to hurt! Toyota turned over documents which described how they bragged about saving $100MM by limiting the US government recall (for sudden acceleration).

Some Japanese view this entire Toyota incident as manufactured by the US in order to help GM (which is largely owned by the US).




USA! USA! USA! Really exciting hockey game last night where the US beat the Canadians.  Even though both teams were full of NHL players, this would be like our NFL stars losing to CFL starts.  Canada will be in mourning today.  For me, this was an exciting game and while I was obviously rooting for the US, I like Canada and the Canadians.  If we don’t win the gold medal, I want them to win it.




Maybe I just need to move to Canada?  While I’m not a big hockey fan, this game shows exactly what’s wrong with the US.  This game was the biggest event of the Olympics for the Canadians.  In the US, the game was carried on MSNBC and we put some goofy skating on NBC.  That’s an embarrassment.




How skating could be improved. As you know, I’ve voiced my share of complaints about skating in the Olympics.  But, I’ve decided that I need to suggest positive change, rather than simply complain.  I think that we should keep skating as part of the Olympics.  BUT, I think that four teams (or individual skaters) should conduct their routines simultaneously.  Not only will this reduce the amount of time that we are subjected to this “sport,” I think it may actually leave us wanting more.
_____________________________________
If you want to be on my email list:

1.  go to www.leedsonfinance.com

2. toward the top right corner is a place to click on for email service — click and enter your email address
3. you will receive an email which will require you to click on a link to confirm that you want to be on the list

IMPORTANT: if you don’t receive the email in step 3 or you don’t click on the link, you won’t be on the list.  Sometimes, people who use corporate emails get blocked (it’s probably 50% of the time).  So if you don’t get the email, you know you need to use a personal email.